Inflation on the right track but rate cuts in doubt

The Reserve Bank may resist cutting interest rates next month because its outlook is complicated by a strong jobs market, high government spending and a falling dollar, a new Deloitte Access Economics report says, despite underlying inflation moving sustainably towards the 2-3 per cent target band.

Despite uncertainty on the RBA cutting interest rates in its February meeting, Deloitte partner Stephen Smith expects the cash rate to fall from 4.35 per cent to 2.85 per cent by the end of next year, with the average mortgage holder to be $8000 better off.

“While the conditions for a rate cut are now real, a cautious RBA may well hold off until more information on the domestic economy and the rapidly changing global context is available,” Mr Smith said.

Deloitte’s Business Outlook report comes amid expectations inflation figures released on Wednesday will show underlying prices growth slowed to 3.3 per cent in the year to December.

Some economists believe this will be low enough to justify a rate cut at the RBA’s February meeting, which would be a boost to Anthony Albanese’s re-election chances.

Jim Chalmers on Tuesday moved to put the spotlight on headline inflation, which is expected to again be below the 2 to 3 per cent target band, despite the RBA being more focused on underlying prices growth when considering interest rates.

The Treasurer also pre-empted expectations that headline inflation would rise slightly as more Australians come off cost-of-living support by declaring “any headline inflation number with a two in front of it will show that inflation has more than halved since we came to office”.

“Any inflation number with a two in front of it will show that headline inflation is still within the Reserve Bank’s target band,” Dr Chalmers said. “And any progress on underlying inflation would be welcome as well.”

The Deloitte report expects the economy to improve in 2025 but says it “remains beset by challenges”, with dwelling construction unlikely to be high enough to improve the housing crisis.

The report expects economic growth to increase from 1 per cent in 2024 to 1.6 per cent this year and 2.3 per cent next year.

Unemployment, however, will rise to 4.4 per cent by the end of the year with underlying inflation to fall to 2.6 per cent.

Deloitte is predicting real wages growth for the next four years.

Dr Chalmers said the Deloitte report “makes it clear the soft landing we have been working towards is looking more and more likely”.

“Inflation is down, wages are up, unemployment is low, we’ve overseen the creation of more than 1.1 million jobs and as a result, Deloitte expects growth in Australia to pick up this year,” he said.

Peter Dutton said the RBA’s goal of cutting rates was being undermined by government spending. “If they’ve got a government with its foot on the accelerator and the Reserve Bank’s tapping the brakes, that just always ends in tragedy,” the Opposition Leader said.

“There are a lot of families at the moment who voted for Anthony Albanese believing that good times were ahead, and it’s been the complete opposite.

“That’s why I think people increasingly are souring on the Prime Minister and this bad government.”

AMP chief economist Shane Oliver said he expected underlying inflation in the 2024 calendar year to come in at 2.4 per cent, with headline inflation to drop down to 3.2 per cent.

Mr Oliver’s predictions are 0.1 per cent below the market consensus, although he believes that underlying inflation of 3.3 per cent should be enough for a rate cut in February.

He said the RBA would take more notice of the underlying inflation than the lower headline rate, as the latter was volatile and being artificially lowered by federal and state government energy rebates.

“The Reserve Bank knows that the headline bounces around a lot,” Dr Oliver said.

“Most economists know, the RBA knows, and I think the government knows, that headline figures can bounce around a lot.

“There are a whole bunch of cost-of-living (effects) which have depressed the numbers in the last two quarters, energy rebates have been a big part of that,” he said.

“That can have the effect of distorting the downward pressure of inflation.”

This content first appeared on The Australian.